Tax Burden chart
Source: Tax Foundation

Michigan State Treasurer Robert Kleine recently wrote this about the role of taxes in the state’s failing economy: "After numerous tax cuts, which resulted in dwindling state revenues, it is time to try another strategy: investment." By which he means not "investment," but a massive increase in state taxes and government spending.

Sadly, similar superficial and spurious correlations frequently are made by opponents of state budget cuts who now demand huge tax hikes to protect an expensive-government status quo. This simplistic analysis makes no effort to consider what the state’s economic performance would have been had Michigan not reduced the burden on individual and business taxpayers with a string of Income Tax and Single Business Tax rate reductions between 1999 and 2004.

The dirty little secret is that Michigan pays too much for the government it gets.

Another claim made by tax increase proponents is that Michigan is not a "high-tax state." They favor indicators like the Tax Foundation’s State Business Tax Climate Index, where Michigan ranks 24 places from the bottom. But that mediocre status takes on a darker shade in the light of also having poor regulatory and labor law climates.

In other tax measures, the state does less well. In overall state and local tax revenue (minus federal transfers) as a percentage of state gross domestic product, Michigan is the 22nd worst. In state and local taxes per dollar of personal income, we’re the 19th worst. In taxes per job, Michigan is just 14 places from the bottom. When those figures are next updated, it’s all but certain that Michigan’s tax rankings will have a worse showing.

The more sophisticated among the tax-increase boosters must know that no state or nation experiencing economic decline has ever taxed its way to prosperity — higher government spending does not increase overall employment or create economic growth. Given this, many question what’s really behind the tax-hike push.

The dirty little secret is that Michigan pays too much for the government it gets. Politically powerful state and school employees benefit from extraordinary compensation packages that greatly exceed comparable private sector positions, and even the public sector in other places. Here’s some evidence:

  • Recent Mackinac Center research shows that the average Michigan state employee receives a salary and benefits package worth nearly $75,000. The comparable figure for private sector workers is approximately $58,000.

  • A 2006 survey by the American Federation of Teachers showing that "journey" level Michigan prison guards earned $43,785 on average, compared to a national average of $33,531.

  • Recent testimony before a state Senate committee indicated that Michigan pays up to $6,000 more to house a state prisoner for a year compared to some other Midwest states.

  • Despite incessant poor-mouthing by the state’s public universities, figures collected by the federal government show that between 2000 and 2004, per-pupil expenditures at most of them greatly exceeded the rate of inflation.

  • A 2005 study commissioned by the Legislature from a private consulting firm showed that, on average, per-employee public schools health insurance expenditures exceeded even the cost of generous state employee coverage by some $2,100.

  • The same study showed that statewide, schools could save $422 million annually by shifting employees to a preferred provider health plan with modest co-pays.

  • New York’s Manhattan Institute recently released data on the hourly pay rates of public school teachers in 61 metropolitan areas. The Detroit region was the highest in the nation. Grand Rapids came in eighth, and the hourly rate in both exceeded the mean for white collar and even specialty/technical workers by a substantial margin.

  • Failing to repeal an outmoded "prevailing wage" law that requires above-market wages on school construction projects may make union bosses happy, but adds an estimated $150 million annually to school construction and repair project costs borne by taxpayers. Failing to privatize school food service, custodial and transportation services adds hundreds of millions of dollars to education budgets.

In recent "town hall" meetings Gov. Jennifer Granholm intimated that without tax increases the state would have to cut "all funding" for colleges and mental health services, or release all prisoners and push pregnant women off Medicaid. This is nonsense. The evidence above shows that the main effect of tax hikes will be to further insulate a privileged class of government workers from the impact of economic changes that have affected every other resident of the state.

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Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

Summary

Michigan’s budget crisis is not the result of previous tax relief, but of a political unwillingness to require state agencies and employees to make sacrifices similar to those made by residents and businesses in the state.

Main Text Word Count: 718

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